On December 19, 2019, in In re Tribune Company Fraudulent Conveyance Litigation, 2019 WL 6971499 (2d Cir. Dec. 19, 2019),1 the Second Circuit held that the "safe harbor" provision in section 546(e) of the Bankruptcy Code barred claims seeking to claw back payments that Tribune Company ("Tribune") made to public shareholders in 2007 as part of a go-private transaction. That section bars the avoidance of certain types of securities and commodities transactions that are made by, to or for the benefit of certain protected entities (each a "Covered Entity"), including a "financial institution."2 The Second Circuit held that Tribune constituted a financial institution pursuant to the Bankruptcy Code definition of "financial institution," which includes the "customer" of a financial institution when the financial institution acts as the customer's "agent or custodian ... in connection with a securities contract." The Second Circuit also reaffirmed that the safe harbor preempts claims for constructive fraudulent conveyance under state law because the claims are "in conflict with" "[e]very congressional purpose reflected in Section 546(e)."3
The decision is significant in the wake of the Supreme Court's February 27, 2018 ruling in Merit Management Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2018), which limited the scope of the safe harbor and called into question whether the safe harbor still protects securities transactions such as those in Tribune.4 Tribune signals that, at least in the Second Circuit, the safe harbor may still protect securities transactions where a financial institution acts as agent or custodian for the transferor or transferee as its customer.
Supreme Court Decision in Merit Management
Prior to Merit Management, several circuits, including the Second Circuit, held that the safe harbor protected transfers that passed through a financial institution or other Covered Entity acting as a conduit, even if neither the transferor nor the transferee was itself a Covered Entity. Merit Management rejected that theory and held that the safe harbor protects a transaction only if the transferor or the transferee of the "relevant transfer" (i.e., the "overarching" transfer sought to be avoided) was itself a Covered Entity.5 Merit Management thus limited the scope of the safe harbor.
Merit Management expressly declined to address whether, because the Bankruptcy Code defines a "financial institution" to include the "customer" of a "financial institution" under certain circumstances,6 the safe harbor protects a transfer made by or...